Silver linings: The forecast is bright for data centres and cloud services

With growth in demand for data centres and managed and cloud services expected to be in the double and triple digits, there appears to be significant opportunity in this segment of Saudi Arabia’s ICT market. Pressure on departmental expenditures in the public sector and a subsequent slowing of growth in the private sector could act as drivers for this expansion as customers seek cost-saving synergies. However, there are also issues to address, including security fears, regulation and the development of effective strategic partnerships.

Market Dynamics

According to a 2015 report on data centres and managed and cloud services in Saudi Arabia by the Communications and Information Technology Commission (CITC), the industry regulator, spending in these three subsectors of the ICT market reached SR609m ($162.4m), SR912m ($243.1m) and SR189m ($50.4m), respectively, in 2014. Between 2011 and 2014 growth in expenditure in each area grew by 48%, 55% and 373%, respectively, with CITC anticipating this pattern would continue. By 2019 the market for data centres in Saudi Arabia is projected to reach SR1bn ($266.6m), with an additional SR1.4bn ($373.2m) for managed services and a cloud services market worth SR476m ($126.9m). This would represent compound annual growth rates (CAGRs) in data centres, and managed and cloud services of 13.4%, 18.2% and 36.6%, respectively, compared to an anticipated sector-wide CAGR of 12.4%.

Significant growth is also expected in the space offered in data centres, which grew from 17,100 sq metres in 2011 to 24,300 in 2014. The CITC predicts 39,500 sq metres will be available by 2019.

Growth Drivers

According to the CITC, most organisations using data centres in 2015 used them for email, apps and web hosting, while a smaller number were seeking storage hosting, dedicated server and managed server space. A growing number of organisations also saw the value in having disaster recovery solutions to ensure business continuity and the ability to back up their data. Another attraction was access to better technology. “It is important to look at how the various cloud models can provide companies with increased efficiency, scalability and adaptability, maximising their competitive edge in their digital transformation journey,” Kareem Sherif, general manager of Intel Saudi Arabia, told OBG.

Service Providers

Growth in the market is also being advanced by a proliferation of offerings from service providers. Saudi Telecommunications Company (STC), Integrated Telecom Company (ITC) and Mobily are all major players in this field, but many smaller companies acting as hosting providers or systems integrators are also among a list of 17 companies with data centre and managed and cloud services offerings. The CITC is working on a study focused on identifying the optimal approach to regulating cloud services, but noted that it has already issued licences for internet services and hosting infrastructure, which are pillars for cloud services.

The hosting provider NourNet launched its 4500-sq-metre data centre in March 2016, with an additional 1800 sq metres set aside for future expansion. The firm says costs could be reduced if the CITC were to allow all licensed internet services providers to buy bandwidth regionally or regulate the prices being offered by local operators. Currently, NourNet has to buy bandwidth from STC, Mobily or ITC, which means its costs in Saudi Arabia are much higher than in countries such as Jordan. “In Saudi Arabia licences are restricted, meaning you cannot buy bandwidth except from local operators, and these restrictions have led to unnecessarily high data costs in the market,” Amjad A Hafez, CEO of NourNet, told OBG.

Expansion Area

Both STC and Mobily have invested heavily in the construction of their own data centres, hoping to capitalise on their investments as more organisations and businesses in the Kingdom recognise the potential advantages of utilising their facilities. “When it comes to difficult times, I think ICT is the answer, because it will provide solutions that will optimise the cost when it comes to cloud and managed services,” Ismail Alghamdi, chief business officer of Mobily, told OBG. “Service providers have already invested in data centres, and this means there are facilities for clients to use rather than wasting money in building their own data centres.”

STC has built Tier-4 data centres in Riyadh and Jeddah, and another is under construction in Dammam. The firm also has a number of smaller Tier-3 centres. “We have built substantial capacity, which we want to use to serve the local economy, and increasingly we are seeing space in our data centres being filled,” Sacha Dudler, corporate performance management general manager at STC, told OBG. “We launched our cloud service in October 2015, and managed services is becoming a significant part of STC’s business.”

Cloud Caution

Many business leaders in Saudi Arabia’s ICT community attribute a relatively slow uptake of cloud services to a risk-averse and cautious mentality in many firms and government departments. However, many sense the mood is changing. “There will be resistance to cloud initially, because people are used to having in-house data storage and having direct control of their information,” Mamoon Najm, CEO of NOVIA sat, a communications firm, told OBG. “However, this will change over time as people become more comfortable with the concept.”

Some companies believe that different types of cloud offerings will develop in Saudi Arabia so that customers will be able to choose between different services. These could include: one-size-fits-all public cloud services; private cloud services designed to meet the needs of specific organisations; or hybrid cloud services, where elements of public cloud services, such as email, might be offered alongside private cloud services dealing with more sensitive data or services like medical records. “In terms of cloud computing, the uptake has been quite slow, but it is still in the early stages, still evolving,” Amer Kabbara, general manager of Baud Telecom Company, told OBG. “Currently, the only cloud around is public cloud, while private is not yet there.”

Sharing Facilities

The desire to retain control of data and systems, combined with the considerable spending capacity of some government agencies and larger companies, has led to a proliferation of data centres built to serve the needs of specific entities. As government budgets are reduced and businesses get used to shared facilities, there may be opportunities for synergies in expenditure and service provision. “Everybody wants their own data centres and even disaster recovery centres. However, there should at least be a single, national disaster recovery centre,” Abdalla Amara, senior partner and country manager of Devoteam, an IT consultancy, told OBG. “There are more opportunities coming from tighter government spending, as more people are looking to become more efficient with their resources, shifting towards smarter modes of spending.”

Beyond major government contracts, there are also opportunities to help smaller firms save money, but the physical distances between population centres present challenges. “Using the cloud will help to eliminate the need for multiple data centres, as a single centre will be able to service areas across the country. This will reduce the running cost and allow for better IT management,” Khalid Al Moammar, president of Al Moammar Information Systems, told OBG. “Cloud services offer the biggest benefits for small and medium-sized enterprises by reducing costs and improving their access to quality services. This allows them to focus more on their core business.”

Disaster Recovery

As more organisations see the benefit of contingency planning in the event of a data or security breach affecting their IT systems and operations, there has been a growing demand for disaster recovery solutions. Managers considering how to deal with the issue can opt for a capital expenditure or operational expenditure approach to the problem. “If one considers the example of disaster recovery, there has been a tendency in Saudi Arabia for clients to wish to build their own new data centre, but that is costly and it can take years,” Khaled Al Dhaher, managing director of HP Enterprise Saudi Arabia, told OBG. “However, disaster recovery can also be offered as a service, where that company can rent space in a dedicated centre and use it if they need to, rather as they might rent an apartment in a shared building rather than buying their own home.”

Security Concerns

Although cloud services offer opportunities to share in technological advances and reduce ICT budgets, there are also concerns about storing data beyond Saudi Arabia’s sovereign borders and cyberattacks. “There is a royal decree banning the hosting of government data outside of Saudi Arabia, so there are huge opportunities for investment in local data centres,” Yasser Alobaidan, CEO of Jawraa, an IT and telecoms solutions provider, told OBG.

Some see security fears as one of the biggest inhibitors of the development of the cloud market, although attitudes may be changing. “There is an uptick in demand and use of cloud services by enterprises in the Kingdom, but it is still at a slower pace than the rest of the developed world as they need to break the fear of data security,” Sami Saadi, managing director of Saudisoft, an IT solutions firm, told OBG.

Beyond the threat of cybercrime, businesses and the government may also need time to develop alliances with partners to allow an ecosystem to develop. “If a big communications company like STC builds a data centre, they should engage separate companies to offer point-of-sale and support services, but that layer is missing, and that is a great opportunity for Saudi companies,” Al Dhaher told OBG. “It is about enabling services to be offered by different partners. It is not outsourcing, but giving partners the opportunity to use the platform you have created.”